China's president just declared war on global gambling

Gambling is illegal on
mainland China, and advertising Macau's casinos to mainlanders is
illegal.Reuters

Chinese President Xi Jinping has officially declared war on
the global gambling industry, warning foreign casinos that
Chinese citizens will be gambling much less in China, neighboring
countries, and the US.

"Some foreign countries see our nation as an enormous market, and
we have investigated a series of cases," said
Hua Jingfeng, a deputy bureau chief at the Ministry of
Public Security. "A fair number of neighboring countries
have casinos, and they have set up offices in China to attract
and drum up interest from Chinese citizens to go abroad and
gamble. This will also be an area that we will crack down on."

In other words, Xi is telling companies around the world that saw
their revenue triple when Macau opened up to foreigners that the
Chinese gambler will not be following them abroad to countries
like Singapore and the Philippines where billions have been spent
on new projects to attract those same people.

Asian companies have heretofore capitalized on the traveling
Chinese gambler in the Philippines, Australia, and especially
Singapore. A combination of tax credit and increased gambling
revenue in Singapore
saved Las Vegas Sands' fourth-quarter earnings. Now
that's set to take a hit.

And Chinese gamblers apparently won't be going to Macau as much
to gamble, either. Xi's government has sworn to cut down on
advertisements — sometimes in the form of annoying text messages
— promoting Macau casinos. Visa restrictions will tighten,
according to analysts, and even retail gamblers will have their
money tracked as officials monitor UnionPay, the only domestic
bank card in mainland China.

Chinese President Xi
Jingping.Reuters

The latest
announcement goes above and beyond the pain Xi's administration
has already put Macau's casinos, and the world's casino
companies, through over the past year. The president's
anticorruption crackdown has slowed the movement of mainlanders
to the island — the world's largest gambling center —
dramatically.

Gaming revenue in Macau contracted for the first time since
foreign companies were allowed to do business on the island in
2002. It plummeted 30% in December alone. The junket system,
Macau's financing system for high rollers most affected by the
anticorruption drive, is on life support after 16% of junkets
closed in 2014.

So Xi's declaration is coming when companies around the world —
from MGM to Las Vegas Sands, from Macau-based companies Melco to
SJM Holdings — are at their most vulnerable.

Melco
Crown Entertainment gaming resort City of Dreams and the first
Hard Rock Hotel in Macau.Reuters

Casinos, especially foreign firms, have given no indication that
they saw this coming. On a conference call
earlier this week, Steve Wynn, CEO of Wynn Resorts, lamented
his company's weak fourth-quarter earnings, and struck an almost
defeated tone about the government's control over the future of
his business.

"China remains a big question mark. We have more questions than
answers, thousands of our Macau employees are anticipating
promotion and a better life because of Wynn Palace ... We have
learned in the last 12 years to behave in China, and that is to
listen carefully to what the leadership says and to conform with
the program as we are their guest," said Wynn. "We wait for an
announcement from the government with baited breath ... What we
are seeing in China is an entrenchment."

He said he could only hope "our ambitions to grow in Macau
will continue to develop” and that that was the only kind of
statement he could appropriately make at the moment.

At the same time, he assured listeners that Wynn's dividend was
not at risk in the near future, and that the company would
continue to diversify its offerings in Macau away from gambling
and toward more hospitality. He was still talking about building
in 2016.

Xi's declaration against foreign companies is likely not the
announcement Wynn was hoping for.

Now, the Chinese government will be hitting the global gambling
industry on two fronts. One is in Macau, where Wells Fargo
analyst Cameron McKnight argues that the anemic revenue we saw in
the last quarter or two of 2014 is here to stay.

Wells Fargo

In a recent note, McKnight wrote:

China’s President Xi Jinping has stated that China must adapt
to a “new normal” as the government balances economic reform
with healthier and more sustainable growth.

We believe Beijing has imparted this view on Macau and
is targeting Macau market growth that is in line with that of the
broader Chinese economy.

The government has deliberately slowed growth through several
policy actions: (1) visa restrictions, (2) the
anti-corruption campaign, and (3) UnionPay monitoring. We believe
the Macau government has embraced the “new normal”
environment, evidenced by the changes in government
leadership and a tough stance on smoking, dealer labor, and
gaming tables.

Indeed, as the chart above shows, junket financing for China's
high rollers — the people who contribute most heavily to Macau's
gaming revenue — correlates with the
country's total social financing (TSF). TSF is a measure the
Chinese government created in 2011 to paint a more accurate
picture of credit growth in the country. It includes debt held by
nonstate entities, and the Chinese government is trying (often
unsuccessfully) to get that number to shrink.

That means Macau will shrink too — at least until it becomes a
land of Cher concerts and family-friendly restaurants.

One of the
worst parts of all of this for casino companies is that they've
spent about $23 billion on new Macau projects set to open over
the next year or two, according to Union Gaming Research.